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Major Tax Law Changes Explained

Mar 29, 2018

Major changes to the tax law should mean lower income tax bills for many next year.

The Tax Cuts and Jobs Act is the first overwhelming change to the tax code in more than 30 years, so there's a lot to digest. Bell Bank's corporate counsel Greg Hammes, who also has experience as a certified public accountant, explains nine big changes you need to know:

1. Most of the rates in the tax brackets have been reduced, and the top 4 brackets have been widened.

What this means is many people will pay less in taxes, and except for higher-income earners, married couples filing joint taxes will not be bumped into a higher tax bracket. For example, before the act, if you made $80,000 as a single person, your top tax rate was 25 percent. Under the act, it's 22 percent. Before the act, a married couple each earning $80,000 (for a total of $160,000) and filing jointly would have been bumped into the 28 percent tax bracket. Now, they would stay in the 22 percent bracket.

2. The standard deduction has significantly increased. It is now:

$24,000 for married couples filing a joint return

$18,000 for people filing as head-of-household

$12,000 for all other taxpayers

What this means is fewer people are likely to claim itemized deductions. This may also cause more taxpayers to consider bundling tax deductions. For example, they may donate more in one year and then forgo making donations for a few years.

3. Personal exemptions are no longer allowed.

What this means is you can no longer deduct a set amount for each taxpayer and dependent you claim on your return. For the 2017 tax year, the exemption was $4,050 per person - in addition to the standard or itemized deduction.

4. The estate and gift tax exemption amount has doubled from $5 million to $10 million (before factoring in adjustments for inflation) per person for decedents dying or gifts made between December 31, 2017, and December 31, 2025. For 2018, this results in an estate and gift tax exemption of $11,180,000.

What this means is fewer taxpayers will be subject to federal estate tax, gift and generation-skipping transfer taxes, and a greater focus will be placed on income tax planning.

5. The child tax credit has doubled to $2,000 per qualifying child, and $1,400 of that is potentially refundable based on your earned income.

There is also a temporary $500 nonrefundable credit for each dependent who is not a qualifying child of the taxpayer. And the act increased taxpayers' income limits before the credit is phased out.

What this means is for each child you are able to claim, you now get a credit of $2,000 toward your tax obligation, and you can potentially receive a maximum refund of $1,400 per child. If you have a dependent who is not a qualifying child (such as a parent or another family member you are supporting), you can claim a credit of $500 toward your tax obligation. You will not receive this credit as a refund if you have no tax obligation, unless you have overpaid.

(Note: The credit starts phasing out once you reach an adjusted gross income of $200,000 or $400,000 for married taxpayers filing joint returns.)

6. Funds from 529 accounts can be used for tuition expenses at an elementary or secondary public, private or religious school.

What this means is if your child has a 529 plan, typically a college savings account exempt from federal taxes, up to $10,000 per student, per year can now be used for elementary or secondary school tuition expenses.

7. The deduction is suspended for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer's home that secures the loan.

What this means is if you take out a home equity loan or line of credit, you cannot deduct the interest unless you use the loan or line to buy or improve your home.

8. The deduction for home mortgage interest has been temporarily limited to mortgages of up to $750,000.

What this means is you can deduct interest on up to $750,000 of mortgage debt you incurred to buy or improve a first or second residence. Unless you have enough itemized deductions to exceed your standard deduction, you do not need to worry about this deduction.

(Note: Deductions are no longer allowed for moving expenses, except for members of the Armed Forces on active duty who move because of a military order.)

9. Taxpayers can deduct 20 percent of qualified business income.

What this means is if, for example, you have income from a partnership, S corporation, or sole proprietorship, which is currently taxed using individual income tax rates, you can deduct 20 percent. Deduction limitations are phased in when your income exceeds $157,500 or $315,000 for married taxpayers filing joint returns. There are certain businesses excluded from this deduction.

These changes just scratch the surface of the reform implemented in the Tax Cuts and Jobs Act. Everybody's tax situation is different, so for specific questions, please consult your accountant. Some of the changes are set to expire at the end of 2025.

This newsletter has been written for the general information of clients and friends of Bell Bank. It is not intended, nor may it be relied upon, as tax or legal advice with respect to any matter. This newsletter also cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by the Internal Revenue Service or other taxing authority.